Your Net Worth

The best way to begin your financial plan is to know what you are worth – your net worth.  Calculating your net worth is relatively simple – add up everything you own, calculate its worth and then add up everything you owe and subtract.  Hopefully, you will come up with a positive number.  If you have recently finished college with a lot of student debt, that number may be negative, but you have a lot of time to turn it around.

For most of us, the most valuable thing we own is our home and our car.  To figure your net worth take the market value of your home and subtract the mortgage balance.  Likewise, get the value of your car and subtract any loan balance.  These two figures will likely reflect much of your net worth.

Next, add savings and investments.  Include the money in your retirement accounts that would be available to you if you left the job tomorrow. If you have accumulated cash in a permanent life insurance policy, add that in also.

After that add in the value of your stuff that has value. Include jewelry, any collections (coins, stamps, guns, etc.) Don’t include stuff that depreciates rapidly.  Unless you have antique furniture, I would ignore furniture, computers and old text books.  Do look in your garage, attic, and any other place you use for storage.  Do look on your walls for art work that may have value.

Do you own land other than your home?  Rental property?  Interest in a small business?  If you do, calculate the value and add it to the plus side.  When calculating the value of a business, don’t forget the value of good will.

To arrive at your current net worth, add in the positive value of your home, car, stuff, and anything else of value.  That number will serve as the baseline to track your progress toward your financial goals.  Compute it annually.  I recommend you do this when you do your taxes.  Realize that the value of your car will decrease, but the value of your home and savings and investments should increase.  If your net worth does not increase, take a close look at your cash flow and resolve to make adjustments in the coming year.

Cash Flow: Money In, Money Out

Cash flow is what you earn minus what you spend.  For many of us, there is too much month left at the end of our money.  How often have we looked back at the end of the month and cannot figure out where our money went?  We were going to take everything left over at the end of the month and put it in savings, but nothing is left.  What’s worse is that there is a week before we get paid and we are out of money.  Sound familiar?  I hope it doesn’t.  But for many of us there is nothing left at the end of the month to put into savings.  What to do?

First; keep close track of the money you spend – I mean every nickel. Get receipts from everyone; that includes fast food, gas pumps, grocery stores and especially that restaurant where you have lunch. Any money you spend that doesn’t produce a receipt should be recorded somewhere, either on your phone or the back of an envelope. At the end of the day empty your pockets, or handbag, and log in those receipts. I am reluctant to recommend spending money, but investing in a money management program will save you money over time.   I have used Quicken for years – cost is about $30, but there is any number of money management apps for your smart phone.  What is important is to understand that the small amount of money you spend for extras every day, particularly food, is what interferes with saving and investing.

I recommend either buying software or creating a budget to forecast your cash flow over the month, or go online to any number of sites that will offer it for free.  I find it a lot easier to pay the $30 and avoid the pop-up ads and the other solicitations that come with “free”.

Make sure every dollar is accounted for.  The only way that works is to do your accounting at the end of every day. Take a few minutes and pull out those receipts and notes.  Log them in whatever system you have that works for you. If you gave $5 to some homeless person, log it in.  If you bought a lottery ticket, log it in. Do this faithfully for at least three months and develop your budget.  Hopefully your income is more than your expenses.

Set a goal for savings, and then pay yourself first.  Put money into savings before paying any other bill.  Then pay your mortgage or rent, utilities, car loan and plan for food, and gas for the car(s). Then if there is no money left at the end of the month, at least you will already have set aside money in savings. If there is any money left at the end of the month, give yourself a treat, and eat out.  Bon appetit.